Roads to Resilience

cost-effective analysis of thousands of potential outcomes from various investment scenarios and identification of attractive options. Subsequent discussions around the latter similarly lead to a better understanding of risks and ways to address these. Zurich Insurance also provides a version of this tool, called the ‘Zurich Risk Room’, as an iPad app. Leadership and governance Although discussions and scenario modelling are useful tools for understanding probabilities, often the only way to reduce risks and gain certainty is by seeking to influence future developments, or to ‘create the future’. For example, at Jaguar Land Rover, future technology landscapes are explored by trying to predict the technology roadmaps of competitors based on information from industry conferences and journals and then investing the limited Jaguar Land Rover research and development resources in those gaps where the greatest difference can be made. Through this approach, Jaguar Land Rover has become an industry leader in building all aluminium vehicles. This capability enables the organisation to reduce the weight of future models and, therefore, emissions and fuel consumption, in line with customer expectations, as well as meeting its own high ethical standards and those of the parent organisation – Tata Motors. Examples of this type that demonstrate how consideration of risks enables the organisation to seize opportunities are present in many of the case study organisations. Decisions about, for example, the risk appetite and the degree of flexibility come from the top at the case study organisations. It is important to instil trust, create a sense of inclusion and make people feel happy and motivated to deliver a great customer service. This is why leaders at the organisations often devote time and energy to meet employees, talk with suppliers, investors and other stakeholders and solicit feedback from customers. These processes ultimately help to protect the reputation of the organisation. Not only do the leaders take the time to meet with employees, but they also bring different functions and subject matter experts together to explore and address strategic, tactical and operational issues. They invest in the training and development of their people and then empower them to do what they believe is best. They ask challenging questions and expect the same from others. They encourage change and innovation and are tolerant of (honest) failure. Otherwise, it would prevent the development of new ideas and the communication of critical risk information, so threatening long-term survival. This activity is supported by regular performance and risk reviews to ensure the organisation stays on track, as well as independent audits of the quality of practices.

that we just won’t contract with that typically either have a risk of administration, or typically change hands a lot ... [and] because debt problems arise” (Operations Director, Haven Power). This sharp strategic focus is a first step in avoiding and mitigating certain risks up front as it sets the operational parameters within which these organisations do business. For example, AIG has set a clear risk appetite for all areas of the business. There are clear boundaries within which the senior management team can manage the organisation, so that it makes a return commensurate with the targets set by the board whilst ensuring the ongoing stability of the business and its continued growth and success. The operational risk appetite is a reflection of the attitude of the board and the board needs to ensure that procedures for setting risk appetite are appropriate. The sample organisations use a range of approaches to identify probable future scenarios and then safely test new ideas to understand the upside and downside. This is driven by an investment philosophy that recognises that taking business risks is necessary to remain relevant and successful in a constantly changing world, but doing so in a way that any losses can be afforded. It is about understanding opportunities and risks better before more significant investments are made in support of the organisation’s customer-centric purpose. At Drax, the approach is: “We operate in fairly volatile commodity markets and, therefore, if you have got high business risk, you have to have low financial risk. You have to find the right balance between business and financial risk. We run a very conservative balance sheet that ensures we can ride out any downsides in our performance” (Head of Risk and Corporate Finance, Drax). A tool used by a number of case study organisations is scenario modelling. In simple form, it is about asking “ what if?” questions to understand the business impact of specific changes in key factors using data patterns at hand. For example, in the case of Jaguar Land Rover, these questions could be: “ Assume we lose 10 per cent of volume, what are we going to do?” or “ Assume an emerging market changes its fuel duty overnight, making our products less competitive, what are we going to do?” This same “ What if? ” question is also used by many to start creative discussions and explore new opportunities for value creation. Although perhaps simple, these questions can create rich cross-functional discussions that enable the early recognition of changing contexts, opportunities and agile responses. In keeping with other organisations in the same sector, scenario modelling is ingrained in the business model of AIG and Zurich Insurance and takes the form of stochastic computer analysis. This approach enables the rapid and

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Section 3: Resilience Principle No 2: ‘Resources and Assets’